00:00 Josiah “Think like an owner!” I’m sure you’ve heard that phrase before and maybe even used it yourself. It’s a powerful guiding principle, but in practice, it’s hard to make others feel this way unless they actually have an ownership stake. In this episode, you’ll hear how Mission Hill Hospitality CEO Greg Kennealey does this at his investment firm.
00:43 Greg No one thinks like an owner unless they are an owner. And that mindset drives results on a day-to-day basis and over the long term. And so one of the things that I think has been a foundational element of KSL Capital’s long-term success, and having worked there and come out of that organization, I have that DNA and that mindset, is the decision-making around creating ownership opportunities for employees. And we do that here in a number of ways. So in the real estate private equity world, as you and many of your listeners may know, You have short-term compensation like everybody else in terms of salary and or bonus, but there’s also something called carry or promote, which is a piece, which is a long-term incentive structure set up such that you share in the upside that you create. Investors get their return of capital, they get a preferred return, and then there’s typically some type of a split with whatever’s remaining. And in most investment organizations, the folks who participate in that is limited to the most senior level of the organization. I felt strongly that this was something that needed to be allocated across the entire firm. So every single employee of Mission Hill has a share of the carry. And I think that’s been helpful in attracting top talent. I think it’s helpful in retaining top talent. But even more importantly, it aligns all of us together to think about what we can do every day at each hotel to drive more value that ultimately benefits our investors and us as well. We also try and pull that through down to the hotel level itself, where we’ve created economic opportunities for the general managers of our hotels who are the ones driving the results day to day on the front lines to receive some of that economic upside at a certain point in our investment period as well. And I think that’s also hugely motivating. And frankly, you know, for some of them can be, you know, in an economic sense, life-changing, which is super rewarding.
02:44 Josiah Would you mind explaining the terms carry and promote for someone who has no investment knowledge?
02:49 Greg Yeah, so in simple terms, it’s the share of the profits generated by an investment. So if I can use maybe a mathematical example, and I’ll keep it very simple, but if you give me $100, you’re expecting that $100 back, of course, and then a return on that money. And so let’s say you give me that money, I invest it over five, six, seven years, I turn 100 into 200. Right. I give you your hundred back. I give you a preferred return on your capital. And then let’s say there’s $50 left. Well, you and I would decide in advance how we would split that. And so let’s say that I would get. $15 of that and you’d get $35, then that $15 pool then gets distributed at Mission Hill amongst its employees and in certain cases to general managers of those hotels. The goal of that is that it allows for employees to make a good living day to day, but it allows for great alignment because We get financial reward when we make you, the investor, an attractive return. And if we don’t make you an attractive return, we don’t get any carry or promote. And so what investors like about that is, yes, they’re giving up some of their return, but what they’re getting in exchange for that is the alignment and the ownership mindset, frankly, so that we all don’t think of it as a fee. We think of it as earnings for our families because we’re doing a good job on those hotels.
04:15 Josiah I like that a lot because everyone talks about this and very few people have a practical economic mechanism in their business to encourage that. So awesome to see you do that here.
